US-led Strikes Against Yemen Cause Oil Prices to Soar
Crude oil prices rallied after the United States led air strikes against the Iranian-backed Houthi rebels in Yemen in retaliation for attacks on ships in the Red Sea.
West Texas Intermediate (WTI) crude futures surged as much as 4.2 percent to above $75 per barrel on the New York Mercantile Exchange. Brent, the international benchmark for oil prices, also advanced 4 percent to top $80 a barrel on ICE Futures Europe.
Other energy commodities popped on the news, including natural gas, climbing close to 3 percent.
As part of efforts to deter additional attacks on vessels in the Red Sea, U.S. and British forces initiated joint strikes on a dozen targets in Yemen used by the Houthis. The region is a vital shipping route for petroleum products from the Persian Gulf to the U.S. and Europe.
The conflict reignited supply concerns that may be countering the weak demand narrative that has been prevalent in recent months, says Phil Flynn, an energy strategist at The PRICE Futures Group. At the same time, this is more of a transportation issue as it will lead to delays and disruptions, he told The Epoch Times.
“We have the Red Sea and our most important shipping route, Bab el-Mandeb Strait. But if this gets into the Strait of Hormuz, that’s a whole other issue,” he said, adding that if Iran gets dragged into this, “now you’re talking potential risk to production.”
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“The market has to keep that in the back of your mind,” Mr. Flynn added.
For now, transporting crude oil might be the most significant contributor to the sharp increase in energy prices. This comes as Iran seized an oil tanker carrying 1 million barrels of Iraqi crude in the Gulf of Oman.
Mr. Flynn cited new shipping data that confirms at least four oil tankers have been diverted from the Red Sea immediately following the U.S.-led attacks.
According to energy economist Anas Alhaji, the “nightmare scenario” is not an attack on oil or liquefied natural gas (LNG) tankers but rather the main fear is an attack on oil tankers in the middle of Bab el-Mandeb Strait.
“Most of the waters there are shallow, and there are hundreds and hundreds of islands, and most of the water is shallow, and the shipping lanes basically are really tight,” Mr. Alhaji said during a Jan. 12 Spaces session on X (previously known as Twitter). “If you have a major problem there and you have a major oil spill, that lane would be closed and if it is closed, we lose about 5 to 6 million barrels a day of oil.”
On the other hand, the more likely scenario is that the Houthis are not going to escalate their attacks, and any damages to facilities will emanate from individuals and smaller groups “loosely affiliated with Iran.”
For now, the impact on oil prices will be “limited,” and without further issues, there could be a pullback in the market, he added.
Mr. Flynn agrees, writing in an analyst note that “we always have to be cautious of these headlines related to oil price spikes. The reality is that the market is still probably undervalued based upon supply and demand.”
Impact on Shipping
This week, the Iranian-supported rebels carried out a bombardment of drone and missile attacks on Red Sea shipping containers. This is a critical region for international trade as it connects Asia and the Middle East to Europe through the Suez Canal and the Bab el-Mandeb Strait.
Estimates suggest that approximately $1 trillion of goods are transported in the area every year.
Following the Oct. 7 terrorist attack on Israel, the Houthis have been engaged in a constant barrage of attacks. This has forced several companies, including shipping and logistics giant Maersk, to pause all trips through the Red Sea and Gulf of Aden. A majority of containership traffic has been diverted south around the Cape of Good Hope, with volumes tumbling 61 percent to an average of six vessels a day.
“While we continue to hope for a sustainable resolution in the near future and do all we can to contribute towards it, we do encourage customers to prepare for complications in the area to persist and for there to be significant disruption to the global network.”
Following, the Jan. 11 military response, all ships have been advised to avoid the region. The events have pushed up freight rates, says John Kartsonas, a managing partner at Breakwave Advisors.
“The increasing distance adds almost 2 weeks to the voyage and, depending on how long the disruption lasts, will have a positive impact on shipping rates,” Mr. Kartsonas said in a statement.
“Containership rates have now doubled in the last two months. Tanker rates have had a more muted reaction, but it might be the case that they will react going forward given the new information.”
Drewry Shipping, an independent research and consulting services firm for the worldwide shipping industry, reported that its World Container Index increased by 15 percent to above $3,000 per 40-foot container this week and is up 44 percent compared to the same time a year ago.
Global Crude Demand
Since late last year, the storyline in energy markets has shifted from supply concerns to demand fears. However, this narrative could unravel amid higher economic growth forecasts and rising crude demand projections.
“Much of the growth [in oil demand] will be coming in the second half of the year,” said Alan Gelder, senior vice president of research at Wood Mackenzie, in a statement. “This will be fuelled by improving economic growth and lower interest rates.”
China is projected to account for one-quarter of the increase.
China’s fourth-quarter GDP growth rate is forecast to rise 5.3 percent year-over-year. If accurate, this would be up from 4.9 percent in the July-to-September span.
Rob Thummel, a senior portfolio manager and managing director at Tortoise, expects global GDP growth to increase crude demand by as much as 2 million barrels per day.
There will be several drivers in the coming year, mainly geopolitical risks and compliance to production cuts by allies of the Organization of the Petroleum Exporting Countries (OPEC), known as OPEC+.
